Backstage

Why Zune Subscription Model Makes Sense - Sorta

By Jeremy Horwitz ● Thursday, April 5, 2007

It doesn’t take an economics professor to realize that Microsoft’s Zune has been in trouble - arguably “doomed” - since it launched. Without falling back on simple rhetoric like, “no one - especially Microsoft - can stop the iPod,” it pretty much went without saying that the company had next to zero chance of toppling Apple with a chunkier, same-priced device that offered only minor feature advantages over a 30GB iPod, and numerous disadvantages. As the market leader, Apple established a demand curve that looked (very) roughly like this:

In other words, the lower the iPod’s entry price went, reaching a minimum of $69 when the first-generation iPod shuffle was around, the better the chance Apple could reach 100+ million iPods sold. Incidentally, it did so recently without any apparent fanfare. In even approaching that level, the iPod made it really hard for any competitor to even dream of comparable sales, and it seemed almost laughable that Microsoft could even sell 1 million of them in its first year. At a price of $250, the company wasn’t even able to get every member of Best Buy’s Geek Squad to buy them, and to be honest, even though we considered buying one to review on iLounge, we figured that it wasn’t even worth the effort of doing so. With the exception of Zune blogs and a couple of gadget sites (go take a look back), Microsoft couldn’t even squeeze really positive comments out of the people who got them for free.

Part of the issue is that the total number of people who would want to buy Zunes in an iPod-dominated world isn’t all that huge. Even if you add up all the iPod protesters, Apple haters, Microsoft viral marketers, and hard core techies, you’re not anywhere near the 100 million mark. As the second graph suggests, Microsoft’s catering not to the mainstream, but rather vocal protesters and curiosity seekers. So on one hand, it knows it’s not going to rival the sales of the iPod even if it lowers its entry price, but clearly, lowering the price will help. And it has a shot at, say, 20% of the market if it is willing to literally give Zunes away to people - or something similar.

According to a report in Computerworld, Microsoft’s considering just giving people Zunes if they’re willing to pay for a monthly subscription to a Microsoft music store. They’ll presumably fill the Zune with as much music as you want every month, so long as you keep on paying the service fee. This could take on two flavors: stop paying after a certain number of months and you have no music, and probably no Zune. Or, you’ll have to commit to paying long enough so that you’re guaranteed to keep the Zune.

For a company in Microsoft’s position, this strategy would make sense. It could build Zune marketshare, put some money into the record labels’ pockets, and actually circulate some Microsoft-DRMed music - the DRM’s required to keep people from sharing entire rented libraries with their friends. Of course, it would also establish Zune at an apparently attractive ZunePass entry price point of $15, which smaller print would explain would be recurring for 12 or 18 months. By the end, you’d still be paying $200 or so for the Zune, but you’d be doing it in easier-to-digest installments, and enjoying the temporary use of music in the meanwhile.

Speaking for myself, I’ve never been a fan of the rent-to-own concept - either personally or as a business model - but there’s something to be said for the ability to attract people with a low price, particularly if the price includes not just hardware, but also enough content to fill the device for the duration of the payment term. The big problem, of course, is that renting music would leave you without anything to listen to at the end of the agreement: it’s really just a lure to keep you renting more music, and paying more fees. Would that stop people if Microsoft offered such a plan, or would some actually prefer this model? Personal feelings aside, I’d have to guess the latter.

Even without a subscription plan of its own, Apple could easily counter such an initiative by offering financing (“or as low as $5 a month,” as mocked up above) on iPods, but then, perhaps it won’t have to. Zunes might be so tarnished at this point that Microsoft couldn’t win marketshare by even appearing to give them away - even if they’re offered in new colors, as is the current rumor. What do you think?

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Comments

1

Didn’t napster do something like this with an mp3 player a while ago? Sign a one year contract with napster and get a free mp3 player (a decent one, if I remember correctly to).

If anyone can afford to give away their product, it’s Microsoft. But, I don’t know if that would help.

Maybe they could do a promotion like, “buy X years of subscription service AND a zune, and get a mail in rebate for the price of a zune”. That would benefit them in that a lot of people don’t always send in mail in rebates. If you give away the zune from the beginning, then you’re taking a big cut.

Posted by Rachel on April 5, 2007 at 2:55 PM (CDT)

2

Apple has won this battle and rightfully so.

Posted by Craig on April 5, 2007 at 3:13 PM (CDT)

3

The problem with giving away your product for “free” is that strongly affects the product’s perceived value—it makes Zunes seem completely worthless (and even more worthless as a gift, unless someone prepays for you, which I’d think makes it difficult to return). That’s a serious issue.

Posted by lookmark on April 5, 2007 at 3:15 PM (CDT)

4

I’m an Ipod owner with some experience using my adult son’s Zune. Yes, the Zune is a bit thicker with a less elegant finish. Yes, the Zune’s interface is somewhat clunkier than the Ipod although both have a lot in common. The Zune does have a couple of characteristics which distinguish it from the Ipod: Larger screen; inclusion of an FM tuner; a more durable finish, and; a music store that permits tune rental.

To claim the Zune needs to be priced significantly lower than the Ipod may be true in the short-run for MS to obtain a significant piece of the market from Apple. However, I doubt they need to consider offering a “free” device to make a long term run at the Ipod. (Even though such a strategy has been very successful in the world of cellular phones.)

In the longer run the dominate portable music player will be whomever offers the most (Most includes styling, device features and availability of content) the the least. Apple’s current share is not invincible.

Posted by tbsteph in Maylene, AL on April 5, 2007 at 5:43 PM (CDT)

5

tbsteph writes: “Apple’s current share is not invincible.”

And Microsoft has no guarantees of success either. The bottom line is the harder working company will dominate. That unquestionably, has been Apple. Microsoft’s only been coasting on its laurels.

Posted by HG on April 5, 2007 at 6:07 PM (CDT)

6

HG, I believe you are correct. One must also remember that Microsoft is new to this arena. One should also remember that Microsoft has a substantial monetary war chest to work with should they see fit. The distribution of paid media is the next major battle front….Apple may or may not win. I would like to see some new players in the game with fresh ideas.

7

$5/month to own an iPod? Even assuming a $25 down payment up front, that still leaves 45 months of payments… or 3 years and 9 months.

Can an iPod actually last that long?

We’re talkin’ ‘bout an iPod here… not a Honda Accord. :p

Posted by Gojira on April 6, 2007 at 12:07 AM (CDT)

8

Hey Microsoft, you want to sell more Zunes? Why don’t you have actual working models of your music-playing brick in the displays at stores! Every time I wander by a Zune display they have “fake” Zunes with a cardboard display instead of a screen. The brown model literally looks like a piece of crap. Try again, Microsoft.

Posted by Surya on April 6, 2007 at 9:52 AM (CDT)

9

The problem with giving away your product for “free” is that strongly affects the product’s perceived value…

No more so than it does with cell phones; Motorola’s RAZR is a prime example of something that’s now available for nothing, or next to nothing, yet still finds people gravitating towards it.

I do feel that MSFT totally missed the boat with their Zune pricing. Since I own both iPods and the Zune, my own first-hand usage of the Redmond device has shown to me that it’s really a nice machine, even if the support software leaves A LOT to be desired (i.e., it outright STINKS, in my humble opinion). But taken in its entirety, the Zune to me offers far less value than the comparable video iPod, simply because the Zune ecosystem pales badly when compared to the well-established iPod realm.

MSFT could’ve made inroads if they were willing to roll the dice on pricing. That’s where any value would’ve been gained; nothing speaks louder than getting a better deal. That most definitely would’ve created the proverbial BUZZ that would’ve brought viral attention on the device. Instead, all MSFT got was viral derision in so many of the ‘why bother’ assessments that came with the Zune’s release.

But alas, it’s instead the quintessentially typical Redmond muck-up, as if anyone realistically should have expected anything more.

Posted by flatline response on April 6, 2007 at 10:47 AM (CDT)

10

I believe the ipod benefits greatly from iTunes. It is currently the best music service for buying songs/TV/video straight out. Also to sample songs. I tried emusic for 6 months but still prefer itunes. I found my Creative Zen Vision W which is 60GB and cost me $300 was the best deal if I wanted a big screen and also has radio. I don’t see any advantage for having a Zune in its current configuration.

Posted by pagansoul on April 6, 2007 at 1:04 PM (CDT)

11

Microsoft’s strategy isn’t really rent-to-own per se, but rather more like a lease. I personally wouldn’t see much value in paying a monthly fee to listen to music I don’t own. Maybe it’d make more sense for MS to get in the finance business and just collect installments for Zune purchases. How about advertising? I wonder if it’d be possible to get a free MP3 player if every time to listened to a song you’d listen to a 5-10 second ad. Everytime you sync your player, new ads would be loaded. This would of course only be for those unable or unwilling to pay for the MP3 player outright.

Posted by smilindano on April 6, 2007 at 3:01 PM (CDT)

12

Seems like a of of people forget that MS already proved that they can enter a new type of market dominated by another company and compete. Remember the XBOX?